UAE to pump $76bn into energy

Country ranked second after Saudi in energy investment in Mena

By

Nadim Kawach

PublishedSunday, October 02, 2011

The UAE could pump a whopping $76 billion into projects to develop its hydrocarbon sector over the next five years to become the second largest Arab energy investor after Saudi Arabia by overtaking Iran.

Official estimates showed energy capital investments in the Middle East and North Africa (Mena) could total around $525 billion during 2012-2016 but such projects face funding problems, rising costs and other challenges.

“In the contexts of a global economic downturn and regional political turmoil, our review of Mena energy investment for the five-year period 2012-2016 points to a broken momentum, yet mixed outlook. On the one hand, driven by the oil downstream and the power sector the anticipated investment of $525bn is higher than the actual capital requirements found in the last review,” said the Dammam-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

“On the other hand, such a level remains well below the potential investment identified on that occasion. Whatever the interpretation of these findings is, one thing is clear. Project sponsors will continue to face many of the same challenges, ie cost uncertainty, feedstock availability and fund accessibility, with the latter becoming more critical than any time before.”

The study, sent to 'Emirates24|7', said internal financing would not pose major problems as long as the value of OPEC Basket crudes stays above $90.

“In contrast, external financing, which comes predominantly in the form of loans, is likely to be daunting in face of a combination of collapsing loan supply and persistently high cost,” the study said.

“Faced with more pressing social demands, governments may not be able to make up for the funding shortfalls……. their best policy going forward is to attempt to regain private investment momentum.”

A breakdown showed just over two-thirds of the energy capital investment potential continues to be located in the same five countries reviewed previously, namely Saudi Arabia, UAE, Iran, Qatar and Algeria, none of which has faced the sort of upheaval witnessed in the countries aforementioned.

Saudi Arabia, the world’s dominant oil exporter, tops the ranking with $141bn. In this country investment has mostly been generated by Saudi Aramco and Sabic as domestic private investors have continued to struggle to attract capital.

“Taking over from Iran, the UAE has become a distant second with nearly $76bn worth of energy investment,” said the three-page study, authored by Ali Aissaoui, senior consultant at Apicorp.

It said tighter international sanctions, and the retreat of foreign companies, have ended up taking a toll on Iran’s energy investment, which now stands at a mere $58 billion. Similarly, but for completely different reasons, investment in Qatar has also been on a sharp downtrend.

“With the moratorium on further development of the North Field still in place, energy capital requirements have plummeted to $41 billion,” it said. Aissaoui, an Algerian, said the same low amount is found in Algeria where investment recovery seems to be slower than progress in repairing broken governance within the state-owned Sonatrach company.

“Finally, it is worth highlighting the peculiar circumstances of Kuwait and Iraq, where energy investment has remained chronically below potential.” In Kuwait, the study said, the problem seems to be one of policy paralysis induced by indecisive politics.

As a result, major components of the upstream program and key downstream projects such as the giant Al-Zour refinery are still to be decided.
In Iraq there seems to be no major disagreement about the vital need to achieve the full development of the oil and gas sectors.

“However, for the commitment to be credible, the federal government needs to pass a long-awaited package of hydrocarbon legislation and provide durable solutions to recurring security threats and logistic complications.”

Sector-wise, the study showed the oil value chain accounts for 42 per cent of the Mena investment, the gas value chain for 34 per cent and the remaining 24 per cent represent the oil and gas fuelled power generation sector. But the study said it saw more challenges to the investment scene in the region as the average energy project, which has increased almost three times between 2003 and 2008, has resumed its upward trend after declining significantly in the middle of the global financial crisis. But it stressed that the relatively moderate 12 per cent upward trend underpinning the current review should not mislead.

“The extent project costs are predictable depends on the outlook for the price of engineering, procurement and construction (EPC) and its components. These include the prices of factor inputs, contractors’ margins, project risk premiums and an element that mirrors general price inflation in the region,” it said.

“Despite efforts to quantify in a meaningful way each of these parameters, we have found it difficult to infer how up and how long the overall cost trend is likely to be when combining all components.” As for supply, Apicorp said that while aggregate recoverable gas reserves in Mena are substantial and their dynamic life expectancies are fairly long, acceleration of depletion appears to have reached a “critical rate” for more than half the gas‐endowed countries. If production continues not to be replaced in Algeria, Bahrain and to a lesser extent Iraq (the latter can still increase supply by cutting down flaring gas), this can lead to a supply crunch, obviously sooner for Bahrain than later, it said.

The UAE, Oman, Syria and Tunisia would face a similar prospect in the absence of additional imports via respectively the Dolphin Pipeline (Qatari gas to the UAE and Oman), the Arab Gas Pipeline (Egyptian gas to Jordan, Syria and Lebanon), and the transit pipelines to Europe (Algerian gas to Tunisia and Morocco).

Furthermore, the supply patterns of Saudi Arabia and Kuwait have reached a tipping point that should trigger further actions to secure supply, it added. Turning to finance, it said uncertainties surrounding project costs and feedstock supplies are compounded by a sudden deterioration of funding conditions, which is likely to complicate further the strategic decisions energy corporations in the region make with respect to investment and financing.

“In a context of widespread deleveraging, transactions have continued to be structured with higher equity content. To be sure, the upstream and downstream have not much choice but to rely on internal financing, either from state budget allocations or from corporate retained earnings,” it said.

“However, the downstream, which normally exhibits a ratio of 30 per cent equity and 70 per cent debt, has needed higher equity levels. In the oil based refining/petrochemical link the equity-debt ratio has been 35:65.”

The report said the ratio in the gas based downstream link has been 40:60 to factor in higher risks of feedstock availability. In the power sector, the ratio has been reset to 30:70 to reflect much less leveraged IPPs and IWPPs. “As a result, the weighted average capital structure for the oil and gas supply chains is found to be 57:43,” it said.

“Although essentially unchanged from the previous review, this structure confirms the trend towards more equity, when set against the equity-debt ratios of 50:50 found in the 2008-2012 review and 54:46 found in 2009-2013.”